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A Multi-Product Framework Generating Waves of Mergers and Divestitures

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Author Info
James Gaisford
Stefan Lutz ()

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Abstract

Recent waves of corporate mergers followed by divestitures have sparked new interest in economic analyses of these issues. We take the merger paradox from the standard oligopoly literature as a starting point and show that in the absence of any cost-synergies of merger activities, firms do have an incentive to divest further instead of joining mergers. We then analyze conditions where mergers may emerge endogenously as a result of a market game. Due to the nature of the interaction of market-share and market-concentration effects in Cournot oligopolies, a stable internal equilibrium where mergers arise endogenously and simultaneously requires both cost synergies and cost dissynergies. Endogenous merger size is then a function of market parameters as well as cost synergy parameters. Hence anticipated changes in market size or cost synergies attainable through mergers lead to reconfigurations of merger sizes. If ex-ante expectations about merger-promoting changes are not fully realized ex-post, merger waves will be followed by divestiture waves. Firm valuation - based on ex-ante expectation - may increase while actual profits and efficiency of the merged entity - according to the ex-post realization - may fall.

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Publisher Info
Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 36-2007.

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Length: 29 pages
Date of creation: Mar 2007
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Handle: RePEc:icr:wpicer:36-2007

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Related research
Keywords: MNE; FDI; divestitures; product differentiation; multi-product firms; economies of scope;

Find related papers by JEL classification:
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L4 - Industrial Organization - - Antitrust Issues and Policies
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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